Oil Rallies in Early Tuesday Trade

NEW YORK (DTN) -- New York Mercantile Exchange oil futures rallied at the start of regular trade Tuesday morning on short covering after the Colonial Pipeline shut its main gasoline and distillate pipelines on Monday due to an integrity issue in Alabama, with the pipeline operator reporting a fire in the pipeline's right of way and regional sources citing an explosion.

Reports that the Organization of Petroleum Exporting Countries is making progress towards a deal for a production cut at the end of this month also supported the advance following two days of steep losses sparked by OPEC's failure to reach consensus over the weekend in how a production cut by the cartel should be implemented.

At 9:00 AM ET, the December RBOB futures contract had skyrocketed, rallying 14.24cts or 10% to $1.5619 gallon, paring gains after spiking to a five-month spot high of $1.6351. NYMEX December ULSD futures spiked 5.45cts or 3.6% to $1.5584 gallon, paring gains after posting a one-week spot high of $1.5791.

The November products contracts expired on Monday.

NYMEX December West Texas Intermediate crude futures were up 28cts at $47.14 bbl, rebounding off a $46.56 one-month spot low. On the IntercontinentalExchange, January Brent futures added 54cts to $49.15 bbl, rebounding off a one-month spot low of $48.51. The December Brent crude contract expired on Monday.

Late Monday, Colonial said it shut its main lines 1 and 2 which ship gasoline and distillate fuel, respectively, "in response to an integrity event." The pipelines were shut in Shelby, Alabama, "after reports of a fire on its right of way." Both main lines originate in Houston, Texas, and run to the tank farm in Greensboro, North Carolina, where they interconnect with main lines 3 and 4 that continue to Linden, New Jersey, and Dorsey, Maryland, respectively.

This latest incident follows an integrity issue in September that shut the gasoline line 1 and later operated with restricted service from Sept. 9 to Sept. 21 after a leak was discovered in Alabama. Line 1 is a 40-inch pipeline with a flow rate of 1.272 million bpd, and line 2 a 36-inch pipeline with a 1.056 million bpd flow rate.

Internationally, OPEC officials approved on Monday a document outlining the cartel's long-term strategy, a sign its members are making progress in ironing out differences over how and when to manage production levels and, ultimately, oil prices, according to a Reuters report. The approval of the document has been repeatedly postponed, with Algeria and Iran saying OPEC should be prepared to defend oil prices by cutting production. Other reports today said Russia hopes that a consensus between OPEC and non-OPEC nations on cutting output can be reached, raising market expectations that there would be a final agreement aimed at stabilizing a supply heavy market by the time OPEC holds its biannual summit in Vienna on Nov. 30.

A weaker dollar also boosted oil futures, with the dollar index falling to a 10-day low ahead of a two-day Federal Reserve meeting starting today, with the Fed expected to leave the federal funds rate unchanged while setting the stage for a rate hike in December.

Aside from the Fed meeting, market focus over the coming week is going to be on weekly U.S. petroleum inventories due out Wednesday from the Energy Information Administration and the October nonfarm payroll report due on Friday and next week's U.S. presidential elections. The American Petroleum Institute will issue its weekly oil supply report to its clients this afternoon.

George Orwel can be reached at george.orwel@dtn.com